Can Lack of Inventory Save Housing?

The current supply of homes on the market is the best indicator of the future health of the housing market.

Let me say that again: Inventories matter.

Despite the fact that inventories of newly constructed homes fell to a 7.3 month supply in March from an 8.2 month supply in February, builders put 10.6 percent fewer holes in the ground in April.

You would think that all this new job creation, which usually goes hand in hand with housing starts, would push the starts up. Nope, both starts and permits fell in April.

Now a lot of folks are blaming this phenomenon on the weather, with tornadoes and rain throughout much of the Southeast. "The National Climatic Data Center reported that April 'was an historic month for severe weather across the Southeast region,' If we exclude the 23 percent m/m fall in housing starts in the South, overall starts would have risen to 599,000," notes Capital Economics' senior economist Paul Dales.

I'm sorry, but I really don't buy the weather story. Yes, I'm sure it had some effect, but permits were also down 4 percent, and home builder confidence is stuck in the basement, with builders reporting weak buyer traffic and a drop in sales expectations over the next six months. This does not make a builder build.

So back to my inventory issue.

A drop in inventories isn't making the builders build, but what about the existing market inventories? The Realtors reported a small 1.5 percent rise in overall existing homes for sale in March, but the higher sales pace brought the months supply down to 8.4. Yes, I know, a four to six month supply is considered "healthy."

We keep saying that existing home inventories are way too high, which is a roadblock to builders and to price improvement. Well guess what? The inventories are only high in some respects, given this bizarre, historic and bifurcated housing market in which we operate.

A new report from Redfin shows new listings of existing homes dropping across the nation compared to a year ago. Seattle listings down 20 percent, Chicago down 17 percent, Boston down 7 percent and Atlanta down 21 percent to name a few. When you look closer at what type of inventory they're talking about, it's the regular, non-distressed inventories that are falling the hardest. Bank-owned new listings are down too, but that's largely thanks to all the robo-signing delays. It's simple math. Sellers are afraid of still-falling prices.

"In most of the major markets, at least on the coasts, we're seeing inventory down 20 to 35 percent, so regular homeowners are not going to list their homes at these prices," says Redfin CEO Glenn Kelman. "If you had a home to sell, you'd probably wait a year if you could. You'd have to have a hole in your head to list it now because prices are down."

Yes, there are a lot of distressed properties out there in some markets. Las Vegas is the only major market that saw an increase in inventories of homes for sale, but that's because upwards of three quarters of that market is distressed homes. REO (bank owned) and short-sale inventory is high and will likely get higher in the coming months as banks process more foreclosures and push through short sales more efficiently. But organic, non-distressed sellers are holding off, and that is actually creating a phenomenon we haven't seen since the housing boom.

"We've had bidding wars in Seattle, Portland, San Francisco, Atlanta, Washington DC, across the U.S. We have seen increased demand and limited supply, especially for those pretty homes that are listed by regular owners rather than the distressed inventory that's listed by the banks," claims Kelman.

I have to say I believe him, because in my DC neighborhood, where there are very few foreclosures if any, there are also precious few listings. I've been watching my local listings for years, from boom to bust, and the current pickings are slim.

So dare I say it? Could this inventory issue be the catalyst to home price stability? I'm not talking about the big bad foreclosure markets, but the rest of the country, where demand is rising and the number of listings are falling. I hate to go back to that boring old theory of supply and demand, but might it actually prevail?